The UCI bookstore sells a number of items, including a branded holiday coffee mug. The mug costs $4.50 to make and sells for $12. At the end of the season, unsold mugs are sold off to other retailers at $1.25 each. Since this is a highly seasonal item, only one order will be placed. Assuming the demand for the mug is normally distributed with a mean of 350 units and a standard deviation of 105 units, answer the following questions.

1. What is the overage cost (in dollars)? 
2. What is the underage cost (in dollars)?
3. Find the critical ratio.
4. Find the best order quantity (that is, the best one-time inventory decision) to maximize the shop's expected profit for selling this product.
5. What is the service level corresponding to the optimal order quantity?
6. How many sales can the bookstore expect to lose with the optimal order quantity?
7. How much inventory would the bookstore expect to be left over with the optimal order quantity?

Answer rating: 100% (QA)

To answer the questions we can use the Newsvendor model which is commonly applied to onetime invento... View the full answer